Bad Faith Claims in Georgia and Florida - Anna Martinez

In Georgia, an insurance company has a duty "'to use ordinary care and good faith in the handling of a claim against its insured.'" Dumas v. ACCC Insur. Co., Eleventh Circuit Court of Appeals, Case No. 09-13027. decided on October 20, 2009. The obligation to act in good faith "arises out of the relationship between the insurer and the insured created by the contract or policy of insurance." Id. That relationship also "creates an independent duty, implied from the terms of the contract, between insurer and insured" that the insurer not injure the insured through negligence or acts of bad faith. Id.

Pursuant to O.C.G.A. 33-4-6 (a), if an insurer refuses to pay a claim within 60 days after a demand is made and there is a finding that the refusal was in bad faith, the insurer shall be liable for a penalty. Certain Underwriters at Lloyd's of London v. Rucker, 285 Ga. App. 844 (2007). Additionally, the courts have held that there are also negligence claims for a bad faith failure to settle. "A bad faith failure to settle sounds in tort [negligence] and involves, at least in part, a claim that the insurer's conduct exposed the insured's personal property to loss." Canal Indemnity Co. v. Greene, 265 Ga. App. 67 (2003); Thomas v. American Global Ins. Co., 229 Ga. App. 107 (1997). 

However, the Georgia courts have held that insurance adjusters do not share the same relationship with an insured as does an insurance company and that "there is no confidential relationship between an insured and the insurer's adjuster." Dumas v. ACCC Insur. Co., cited above; Irons v. CSX Transp., Inc., 224 Ga. App. 586 (1997); Moss v. Cincinnati Ins. Co., 154 Ga. App. 165, 166 (1980). In the absence of a contractual relationship, an insurance adjuster is not liable to an insured for a failure to settle a claim against the insured.

In the Dumas case, an ACCC Insurance Company insured drove her car off a road and struck and killed John Dumas. Mr. Dumas' daughter and wife filed a claim against ACCC. The insured driver's automobile policy through ACCC provided coverage for bodily injuries of $25,000 per person and $50,000 per accident. ACCC assigned an insurance adjuster to handle the claim. The Dumas family mailed the adjuster a settlement demand for the insured's policy limit of $25,000, agreeing to release ACCC but refusing to release the driver from personal liability for the Mr. Dumas's death. The adjuster, without making a counteroffer to request that the Dumas family release the insured driver, proceeded to "[agree] to the terms of [the] demand" and tendered a $25,000 check to the Dumas family. ACCC later asserted that the adjuster had agreed to the demand by mistake, and the Dumas family sued ACCC to enforce the terms of the settlement agreement. The Dumas family dismissed their lawsuit after ACCC agreed to pay the $25,000.

Subsequently, the Dumas family turned around and filed a wrongful death suit against the insured driver. ACCC retained counsel to represent and defend the insured driver. However, the insured driver reached an agreement with the Dumas family, without obtaining ACCC's permission, in which she consented to a judgment for four million dollars and assigned to the Dumas family her potential claims against ACCC. In return, the Dumas family agreed to give up their right to collect from her, personally.

ACCC filed a declaratory judgment case in federal court seeking a determination as a legal matter that it was not liable to the plaintiffs as assignees of the insured driver. In response, the Dumas family filed a complaint alleging that ACCC and the insurance adjuster acted with negligence and in bad faith by accepting the Dumas family's demand without requiring them to give up all claims against the drivers. Both ACCC and the insurance adjustor removed the action to a federal court, and moved to dismiss the insurance adjuster.

The district court ruled that the insurance adjuster could not be held liable for negligence and dismissed him from the action. The court concluded that the insurance adjuster did not have a contractual relationship with the insured and did not owe her an implied duty to act in good faith.

The district court found the Dumas family, as assignees of the insured, could not establish a cause of action against the insurance adjuster for negligence. While the driver and ACCC had a contractual relationship that required ACCC to handle the claim against the driver in good faith, it reasoned, the insurance adjuster did not owe the driver an independent duty to act in good faith.

Florida law on the individual liability of insurance adjusters in bad faith claims is well settled. Like Georgia, under Florida law, "a person making or purporting to make  a contract with another as agent for a disclosed principal does not become a party to the contract." (Citations and punctuation omitted) Stallworth v. Hartford Ins. Co., United States District Court for the Northern District of Florida, Pensacola Division, Case No. 3:06cv89/MCR/EMT, decided on August 8, 2006.  Therefore, in line with the majority of jurisdictions, Florida recognizes that an independent insurance adjuster owes a duty to the insurance company arising out of the contract between the insurance company and the independent adjuster, but the independent insurance adjuster does not owe a duty to the insured unless the insured is suing for an intentional tort such as fraud or deceit. Id.

Although Florida law and the Georgia's decision in Dumas are consistent with the majority of jurisdictions, the majority rule "has been relaxed enough that most states permit actions against [independent insurance adjusters and other] claims intermediaries where the intermediary and the insurer can be said to have operated as something like a joint venture, particularly where there is some sharing of financial risk." Stempel,  Jeffrey W., The "Other" Intermediaries: The Increasingly Anachronistic Immunity of Managing General Agents and Independent Claims Adjusters, 15 Conn. Ins. L.J. 599, 713 (2009). Also, some states have found that where the third-party administrator has performed most of the functions normally done by the insurer and has a substantial financial interest in denying claims, it is logical to hold the third-party administrator to the same standards of conduct and liability as an insurer. Id. at n84; see Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 468-69 (2003).

According to Jeffrey W. Stempel, a law professor at the William S. Boyd School of Law at the University of Nevada Las Vegas, the first prominent case to expressly impose duties to the policyholder upon an independent adjuster was the Alaska case of Continental Insurance v. Bayless and Roberts, Inc, 608 P.2d 281 (1980). 15 Conn. Ins. L.J. at 630. Bayless "provided a beachhead in opposition to the historical view that contract privity and disclosed agency protected TPAs and adjusters." Id. at 632.

 In Bayless, the insured was sued after an explosion of a "paint pot" it owned that was used by the victim in painting aircraft. Id. at 630. Continental Insurance, using an independent adjuster, accused the policyholder of failure to cooperate and threatened to cease defense of the claim unless the insured agreed to a reservation of rights. Id. The insured "refused to accept such a conditioned defense" and Continental Insurance "withdrew from the case." The insured settled and agreed agreed to entry of a consent judgment for $ 618,000, and then sued Continental Insurer and its chief adjuster to recover the amount of the judgment as well as punitive damages. At trial, the jury found that Continental Insurance and its adjuster had negligently conducted the insured's defense, and that the insurance company had breached its duty to defend its insured, and awarded the insured $622,000. Id.

On appeal, the Alaska Supreme Court agreed with the trial court that under these circumstances, the policyholder was entitled to make a bad faith claim against the independent adjuster, affirming the verdict as reasonable. Id. at 630-631. It found the policyholder had successfully accused the independent adjuster of failing to adequately investigate the claim against it as well as failing to inform the policyholder regarding the case, all in breach of an asserted fiduciary duty that demonstrated "gross and wanton disregard" for the interests of the policyholder. Id. Evidence presented at trial suggested that the adjuster had failed to inform defense counsel of problematic facts and had failed to disclose to counsel that the insurer had authorized up to $ 10,000 to settle the case. Id.

While the adjuster argued that he could not be sued because of the absence of a contractual relationship with the policyholder, the Alaska Court noted that "the agent's liability would depend upon the plaintiff's theory of recovery." Id. If the policyholder was asserting only contractual claims, the claim was barred on lack-of-privity grounds. However, intermediaries like the insurance adjuster "could be held liable for negligence arising out of a breach of the general tort duty of ordinary care."

It is important to know that Florida courts have specifically rejected the holding in Bayless, finding that Alaska insurance law is fundamentally different than Florida's insurance law. Specifically, the Alaska court in Bayless held that "an insurer, defending an action against the insured, is bound to exercise that degree of care which a man of ordinary prudence would exercise in the management of his own affairs, and if the insurer fails to meet that standard it is liable to the insured for the excess of the judgment over the policy limits, irrespective of fraud or bad faith." 608 P.2d at 293 (emphasis in original)(citations omitted). In contrast, the well-established law in Florida only allows an insured to sue an insurer for bad faith and not simple negligence. Howard v. Crawford & Co., 384 So. 2d at 1339.

Six years after Bayless, in Morvay v. Hanover Ins. Cos., 506 A.2d 333 (1986), New Hampshire took a similar approach. The home of the policyholders was destroyed by fire and he sought coverage from his property insurer, which retained an independent investigator to perform a cause-and-origin analysis of the fire. Id. The investigator subsequently assessed the fire as suspicious, leading to claim  denial by the insurer. Id. The policyholders sued the investigator as well as the insurer, alleging negligence in the conduct of the investigation. The trial court accepted the investigator's defense of lack-of-privity and dismissed the claim. The Supreme Court reversed, finding that an investigative agent of an insurer conducting a claim investigation owed a duty of good faith to the policyholder "arising out of the [insurance] company's duty of good faith and fair dealing." The Court bolstered its determination by noting that investigators were required to be licensed and were subject to a "general duty to use due care" in the performance of their work.

Although the investigative agency and the individual investigator were not in privity with the plaintiffs,

"[T]hey were fully aware that the plaintiffs could be harmed financially if they performed their investigation in a negligent manner and rendered a report to [the insurer] that would cause the company to refuse payment to the plaintiffs. [They] were also aware that there was a mutual duty of fair dealing between [the insurer] and the plaintiffs.  Under these circumstances, we hold that the plaintiffs have stated a cause of action in negligence [against the investigator and the employee.] . . . .

. . . Although . . . the investigators may give reports only to the insurer, the insured is a foreseeably affected third party. . . . Both the insured and the insurer have a stake in the outcome of the investigation. Thus, we hold that the investigators owe a duty to the insured as well as to the insurer to conduct a fair and reasonable investigation of an insurance claim and that the motion to dismiss should not have been granted."

Id. at 633-634.

The Morvay Court also analogized the liability of the investigator to that of accountants, who "are liable in an action sounding in negligence to that group of persons who foreseeably may rely on the accountants' work." 15 Conn. Ins. L.J. at 634. Consequently, "accountants may be held liable to persons with whom they are not in privity if they perform their work negligently and the plaintiffs are within the class of persons who could have reasonably relied on the accountants' work product."

In essence, the Morvay Court was making the conclusion that "where a claims intermediary was acting as a surrogate or alter ego of the insurer, liability was likely to follow. But where the intermediary's role and authority were limited, the traditional defenses of lack of contractual privity and disclosed agency would likely continue to have force in apt cases." Id.

Five years after Morvay, in Bass v. California Life Insurance Co., 581 So. 2d 1087 (1991), the Supreme Court of Mississippi affirmed the general rule that the policyholder could not sue an independent adjuster for simple negligence, but held that a cause of action would lie if the independent adjuster had acted with gross negligence, malice, or reckless disregard for the rights of the policyholder. However, it required the adjuster to have sufficient independent authority to make it more than simply an appendage of the insurer. Essentially, if the adjuster lacks authority to rule on claims without insurer approval, the traditional rule of no intermediary liability still remains.

Since, courts in New Jersey, Georgia[1], Nevada, Oklahoma, New Mexico, Rhode Island, Ohio, and Colorado, as well as some federal district courts, have to some degree endorsed the view that intermediaries with substantial insurer-like duties and autonomy could be liable for bad faith or other misconduct toward the policyholder. At the very least, some of these state courts have predicted that their state would eventually permit bad faith claims against independent adjusters where the intermediary has sufficiently assumed the traditional administrative and adjusting functions of an insurer. 

The common thread of these decisions is a recognition that in many cases, insurance intermediaries act more like substitute insurers than mere agents. Almost all of the decisions sustaining liability claims insisted that the intermediary engage in more than merely ministerial and robotic claims handling commanded by the insurer as principal to the intermediary's limited agency.

INSURANCE ADJUSTER'S CONTRIBUTIONS TO BAD FAITH CLAIMS

While the courts have precluded insurance adjusters from liability for bad faith claims since there is no contractual relationship between the adjuster and the insured giving rise to a duty, insurance adjusters continue to play a crucial role helping insurers protect themselves from bad faith claims. It is therefore important for insurer adjusters to be aware of recent court holdings on the issue of bad faith.

GEORGIA

Is an insurer acting in bad faith in paying policy limits without conditioning payment on release of its insured, when an insured party demands an insurer pay the face amount of the policy, but refuses to release the insured in return?

In ACCC Insur. Co. v. Carter, the United States District Court for the Northern District of Georgia held that an insurer did not act in bad faith paying policy limits without conditioning payment on the release of its insured, where the Plaintiffs never offer to settle their claims against the insured within the policy limits and explicitly state that they refuse to release the insured for a settlement at policy limits.  Under Georgia law, for liability to arise against an insurer for negligent or bad faith refusal to settle claims against its insured, the insurer must at a minimum have the opportunity to settle claims against the insured within the insured's policy limits.

 "Safe Harbor" Provisions

In Georgia, if an insurer acts in bad faith in refusing to settle a personal claim against its insured within the policy limits, it may be liable for an excess judgment entered against its insured. Fortner v. Grange Mut. Ins. Co., 686 S.E.2d 93 (2009) The insurer's actions must be judged by the standard of the ordinarily prudent insurer. Id. Whether an insurance company acts in bad faith in refusing to settle depends on whether the insurance company acted reasonably in responding to a settlement offer, bearing in mind that, in deciding whether to settle, the insurer must give the insured's interests the same consideration that it gives its own. Id. However, when a settlement offer contains a condition beyond an insurer's control, the insurer can create a "safe harbor from liability for an insured's bad faith claim . . . by meeting the portion of the demand over which it has control, thus doing what it can to effectuate the settlement of the claims against its insured." Id., citing Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683 (580 SE2d 519) (2003)

 FLORIDA

The essences of an insurance bad faith claim is that the insurer acted in its own best interests to the detriment of the insured; the insurer failed to act timely and thereby exposed the insured to an excess judgment.

Florida law imposes a duty of good faith on insurers in negotiating and settling a claim against an insured. In the 2009 case Johnson v. Geico General Ins. Co., 318 Fed Appx. 847 (2009), the Eleventh Circuit Court clearly outlined the insurer's requirements under Florida law when resolving an insurance claim against its insured, based on the most recent Florida court cases. It stated:

[The insuer] has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.... This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. [E]ven in the absence of a settlement offer, the insurer may be liable for bad faith: where liability is clear, and injuries so serious that a judgment in excess of policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations. Bad faith may be inferred from a delay in settlement negotiations which is willful and without reasonable  cause.

(Citations and punctuation omitted) Id. at 849. However, the Court upheld Florida case law standing for the proposition that an insurer, acting with diligence and due regard for its insured, is allowed a reasonable time to investigate a claim and no obligation exists to accept a settlement offer (or to tender policy limits in advance of a settlement offer) without time for investigation. Id. at 851.

Look out for...

In 2009, the Eleventh Circuit Court of Appeals requested guidance from the Supreme Court in the interpretation of two questions regarding the issue of what is needed for the effective reservation of rights under Georgia law. In World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 586 F.3d 950 (2009), the Court of Appeals certified the following two questions for review by the Georgia Supreme Court:

1)       Does an insurer effectively reserve its right to deny coverage if it informs the insured that it does "not see coverage," after the insured had received a written reservation of rights from the insurer's sister company in a similar lawsuit in another jurisdiction, or is a written or more unequivocal reservation of rights required?

2)       When an insurer assumes and conducts an initial defense without notifying the insured that it is doing so with a reservation of rights, is the insurer estopped from asserting the defense of noncoverage only if the insured can show prejudice, or is prejudice conclusively presumed?

In World Harvest, Guideone Mutual Insurance Company assumed the defense of a lawsuit against its insured, World Harvest Church, Inc., without issuing a written reservation of rights. 586 F.3d at 951. Near the end of the discovery period, almost eleven months after assuming World Harvest Church's defense, GuideOne stopped its defense because it decided there was no coverage for the claim. Id. The Court entered a judgment against World Harvest seventeen months later. Id.  World Harvest now seeks to force GuideOne to cover the treat the judgment as covered under the policy (even thought the Court has found that under normal circumstances World Harvest's claim would not be covered) under the reasoning that World Harvest was prejudiced by GuideOne's failure to effectively reserve its rights. Id. at 961.

The lower court had rejected World Harvest's claim that GuideOne denied the insurance claim in "bad faith" because it had found that under Georgia law an insured could prevail on a bad faith refusal to pay theory when the loss actually was "covered under the insurance policy in dispute", but World Harvest has appealed this ruling. The Court of Appeals seems to be waiting for the Supreme Court of Georgia's clarification of the above-mentioned points of law in order to determine the remaining points of appeal, such as the bad faith claim.

The Supreme Court of Georgia has two years to decide on these issues, but may do so as soon as six months. Therefore, an answer to these questions may be available as soon as Summer 2010. Since insurance adjusters are the first line of communication between the insurance company and the insured, the answer to these questions may impact the way insurance adjusters communicate with insureds regarding claims handling under a reservation of rights. 


[1] Gardner & White Consulting Services, Inc. v. Ray, 222 Ga. App. 464, 474 S.E.2d 663 (1996) (holding that __________________________

 

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